What do you do when you have R3.5bn in capital lying around? In Old Mutual’s case, it seems that you decide to start a bank (again).
South Africa’s second-largest listed life insurer said last week it’s applied for a banking licence in a bid to bring its transactional services in-house. Old Mutual already provides unsecured lending to customers and, says CEO Iain Williamson, the division “is a strong contributor to profitability”.
Sound familiar? Capitec took a similar approach when it launched about two decades ago: supply unsecured lending to those snubbed by the traditional banks and offer a cheap transactional account to back things up.
It’s not as if Old Mutual would be starting from scratch, either. Its loans and advances stood at a chunky R18.9bn at end-December, according to an operational update released on November 22. At end-June when the company released its results for the six months, its loan book lending margin (the difference between the cost of funding and the interest received) stood at 14.2% while its credit loss ratio was at 4.6%. For unsecured funding to the poorer market segment, not bad at all. Old Mutual’s credit loss ratio compares with Capitec’s 3.3% for the six months through end-August.
“It is not unexpected that Old Mutual would go this route,” says Sven Forssman, head of equity sales at Kela Securities. “It makes sense to get a banking operation going.” In addition, being able to take deposits will lower Old Mutual’s funding cost and improve its lending margin.
It is not unexpected that Old Mutual would go this route. It makes sense to get a banking operation going
— Sven Forssman
Kokkie Kooyman, executive director and portfolio manager at Denker Capital, also sees the rationale behind it. “The whole thing makes conceptual sense.”
But, as he says, this isn’t the first time Old Mutual has ventured down this road. At the turn of the century, the company’s Old Mutual Bank had branches and ATMs while offering those cashing out their pensions an account.
And surely the banking sector is becoming exceptionally crowded, in an economy that is barely growing. The past four years have seen the emergence of TymeBank, Bank Zero, Discovery Bank and even Shoprite’s transactional offering, Money Market (also through a third party).
According to a World Bank report from 2021, 84% of South Africans older than 15 had a bank account — it is the remaining 16% who are the target of life insurers and grocers.
Williamson says Old Mutual wants to provide “end-to-end servicing” for its customers, “particularly through the existing money account offering. We are building a digital-led banking functionality that will target the upper mass and lower affluent customers.”
This is Capitec’s and, to a lesser extent, Postbank’s playing field. Williamson doesn’t want to be drawn on whether Old Mutual’s proposed bank will target customers served by the faltering Postbank. But Old Mutual certainly has impressive reach, says Forssman about the group’s branch network.
The main issue with starting a fully fledged bank is the amount of capital it swallows. According to banking laws, lenders need to hold a minimum level of capital against their risk-weighted assets (in effect, loans to customers).
That capital needs to come from somewhere: either from skipping a dividend, asking shareholders for money, or through issuing debt. Skipping dividends is bound to irritate investors: just look at Discovery, which passed over its payout to shareholders for a second time earlier this year. Its stock plunged.
And Old Mutual has spent quite a lot on building the transactional offering already.
“The approved expenditure to complete the build of the transactional capability is R1.75bn,” says Williamson. “In line with the business case, we have incurred costs of R830m for the current period and approximately 10% of these costs were capitalised.”
Kooyman is sceptical: “I predict that Old Mutual will spend more than they think [on starting up the bank]. Also remember that the financial quality of the bank’s clients may deteriorate as interest rates keep rising.”
I predict that Old Mutual will spend more than they think [on starting up the bank]
— Kokkie Kooyman
Yet Old Mutual is intent on launching the bank during the second half of 2024, following regulatory approval. “The entity is expected to break even three years after launch,” says Williamson. “As the capability [of the bank] matures [after] break-even, the return is expected to be significantly above the target return of 4% in excess of the cost of equity.”
Arguably, Old Mutual needs something to energise its shares.
The stock is down 16% this year, compared with the FTSE/JSE all share index’s 0.3% decline and a 9.1% increase in the FTSE/JSE financial 15 index. Old Mutual trades at a historic p:e of 5.3 and a forward p:e of 6.3. Most notably, it trades at a 21% discount to its embedded value.
“It looks quite attractive,” says Forssman. “I would definitely pick up a few shares at that price.”
Not everyone shares this positive view. “Look, Iain Williamson is a good CEO,” says Kooyman. “But Old Mutual underperformed for a very long time due to bad capital allocation decisions. The problem behind that is at board level. It is the same people who appointed Peter Moyo as CEO and allowed him to run his own business while being CEO. It is still the same board today.”
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